There may be a way; but, it is so convoluted I wouldn't attempt to walk you through it remotely. It would involve formatting the drive to FAT32, copying the XP installation files to a folder on the disk and running the installation from there. But, since the XP disk won't boot, there is the possibility also that its setup files aren't all readable either.

On occasion you may run into an XP CD that will fail to boot although it is not a common problem. Since XP was released in 2001 I've had 1 or 2 instances where the CD would not boot, and had to go to the Microsoft site and download and make boot floppies. It takes 6 floppies to make the set.

At the Microsoft site they have downloads for XP Home and Professinal boot floppies. You have to choose floppies for the disk you are trying to boot with, i.e. Home or Pro and original release, or SP1 or SP2.

If I'm reading all of this correctly, you are attempting to reinstall XP from a legitimate copy of XP but when you try to boot to the CD it tells you that the copy of XP already installed is newer/more up to date than the copy of XP on the CD that you are attempting to boot from. (wheee, long sentence!)
If you can indeed boot from that CD as you seem to indicate that you can, then you need to reformat the HD, and reinstall XP. It should be fairly simple. The process takes a few hours to format, reinstall XP and get everything updated and all. I'm sure you know that when you reformat that cleans that HD and you lose everything on it. You must reinstall everything. Make sure you have separate copies of any files/folders you do not want to lose. An external HD, USB drive, media card or CD/DVD are needed for those copies. External HD or CD/DVD would be my choice.
If you already have Windows XP installed, why do you need to reinstall?

then you need to reformat the HD, and reinstall XP. It should be fairly simple.

A simple reformat probably won't do, as Setup may still detect the old Windows installation even on a re-formatted drive. The drive needs to be wiped (zero filled) using a utility such as DBAN, or zero fill utility from the hard drive manufacturer.

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